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Can Cable Fast-Forward Past TiVo?

TiVo, the best-known maker of digital video recorders, may need to worry about people like Peter S. Palermo. But Mr. Palermo may also represent just what the cable television industry has been looking for.

A few weeks before the P.G.A. Championship golf tournament in Rochester in August, Mr. Palermo, a real estate broker, was trying to figure out how he would record the broadcast.

Mr. Palermo thought about buying a TiVo, the digital video recorder, or DVR. Using a computer hard drive and advanced software, a DVR lets the user pause, rewind and fast-forward even with live television programs. It also provides a much easier way to automatically record programs than is possible with videocassette recorders.

In the end, Mr. Palermo was turned off from TiVo by the prospect of having to connect all kinds of wires and adding a new box to his home entertainment system. So, instead, he ordered a relatively new product that his cable company, Time Warner Cable, a unit of Time Warner, has been pitching: a set-top box made by Scientific-Atlanta with a DVR already built in.

Mr. Palermo is not alone, and Wall Street and the television industry are taking note. TiVo pioneered the DVR and the TiVo brand -- like Frisbee, Kleenex and Xerox -- has become synonymous with an entire product category. Nonetheless, TiVo's original business of selling stand-alone DVR boxes, along with a monthly support service, appears in danger of being eclipsed by products that are much less expensive for consumers and are integrated with devices that many consumers are already comfortable with, like television set-top boxes.

The new DVR-ready set-top boxes offered by cable companies generally cost consumers nothing upfront and add about $10 to a monthly cable bill. That compares with having to pay at least $200 upfront to buy a stand-alone TiVo recorder and, in most cases, taking on a $12.95 monthly subscription.

And stand-alone digital recorders -- not only from TiVo but also from smaller companies like ReplayTV, which is owned by Digital Networks North America. -- often require cumbersome connections to existing set-top boxes and televisions.

''This really is the last stand for the stand-alone boxes; this is a dying product,'' Aditya Kishore, an analyst for the Yankee Group, a technology consulting research firm in Boston, said in a telephone interview. ''This is the last Christmas for the stand-alone TiVo box, or any stand-alone DVR box. By next year, the DVR functionality will be widely available in a wide range of other devices, including the set-top boxes.''

It is an issue with enormous implications for advertisers, broadcasters, cable-television carriers and satellite-television providers. The Yankee Group estimates that, so far, 2.5 million to 2.8 million of the nation's roughly 110 million homes have digital video recorders. But DVR's inspire fierce loyalty from those who have them, terrify advertisers (because they can be used to skip commercials) and are seen by many media experts as the future of television.

The Yankee Group estimates that in four years, almost 25 million homes will have digital video recorders and that about two-thirds of those will be DVR's that have been integrated into satellite or cable set-top decoders. Even now, while TiVo is the best-known DVR brand, only about 17 percent of the nation's DVR's are stand-alone TiVo-brand units, according to Yankee Group estimates. By far, the leading DVR provider is the EchoStar Communications Corporation, the No.2 satellite-television provider after DirecTV. EchoStar does business as the Dish Network and has developed a digital recording system, which it combines with a satellite television receiver. Last month, EchoStar announced that it had sold its one-millionth DVR unit.

''We believe that over time, DVR technology is going to be the standard,'' said Mark W. Jackson, an EchoStar senior vice president. ''Everyone is going to have it. It's just a question of when -- and who they get it from, of course.''

Time Warner Cable, the No.2 cable-television provider behind the Comcast Corporation, now offers set-top boxes with built-in digital recording in 28 of its 31 local markets. The company expects to soon announce that it had around 250,000 DVR subscribers at the end of the third quarter.

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Meanwhile, Comcast has been concentrating mostly on video-on-demand, which allows customers to view programs stored on a centralized server operated by the cable company. Still, Comcast is also offering the Scientific-Atlanta digital recorder in a few markets and hopes to widely roll out and market a new DVR-enabled set-top box from Motorola early next year.

Those threats are a big reason why TiVo's shares have lost 40 percent of their value in recent months, closing down 31 cents, or 3.5 percent, at $8.67 on the Nasdaq on Friday. That is off their 52-week high from July of $14.51.

That same danger is also why TiVo, which is based in Alviso, Calif., is scrambling to remake its business model. While sales are expected to be robust this holiday shopping season, the long-term viability of stand-alone DVR's appears dubious. In response, the company is reinventing itself as a supplier of software to other companies that want to make their own DVR's.

''People traditionally might think of us as a company that builds a box and has a service with that box,'' Michael Ramsay, TiVo's chairman and chief executive, said in a telephone interview last week. ''We have transitioned from that model much more to a pure software and services model for our company. We will spend less and less time on the hardware side of what we're doing, so that people who build the DVR hardware become our customers, not our competitors.''

Consumer electronics manufacturers including the Pioneer Corporation and the Toshiba Corporation are already marketing new sorts of combination products that include digital recorders with TiVo software. But Tivo's goal of becoming a pure software vendor also carries risks of its own, namely: Why should a company that has DVR technology of its own pay TiVo instead?

According to senior cable-television executives, TiVo is trying to persuade them to use TiVo software in ''premium'' versions of their DVR products. Those executives say TiVo's pitch is that while Motorola's or Scientific-Atlanta's recording systems might be fine for the low-price end of the market, TiVo's more-advanced software appeals to consumer with more money to spend.

Mr. Ramsay of TiVo would not discuss specifics of his negotiations with cable companies, but, for now, executives at the biggest cable companies appear to be taking a wait-and-see approach to TiVo's overtures.

In that vein, perhaps the biggest uncertainties facing TiVo are the plans of Rupert Murdoch, whose News Corporation has agreed to acquire control of DirecTV, a unit of the Hughes Corporation. The News Corporation already controls a company called NDS, which is developing its own DVR technology. The DirecTV acquisition is expected to be completed by early next year, and the NDS relationship raises at least the threat that DirecTV, until now TiVo's most important customer, could spurn TiVo for another partner.

A News Corporation spokesman declined to comment. Back in Rochester, meanwhile, Mr. Palermo is focused on the World Series. A former minor league player in the Baltimore Orioles's organization, he said he liked to use his DVR to pause, rewind and analyze the motions of hitters and pitchers.

He has repeatedly reviewed the home run by Aaron Boone early last Friday morning that propelled the New York Yankees into the series with the Florida Marlins. ''Let me put it this way,'' Mr. Palermo said of his DVR, ''I got to enjoy that home run a whole lot more than anyone else watching.''

Correction: October 27, 2003, Monday A chart in Business Day last Monday showing the costs of competing digital video recorders misstated the most common monthly fee for the DirecTV recorder with the TiVo service. It is $4.99, not $4.95.